Seoul – Q1/2021

market in minutes Seoul Prime Office Savills Research

Savills team Please contact us for further information

SOUTH KOREA Crystal Lee CEO +82 2 2124 4163 [email protected] Kookhee Han Senior Director Investment Advisory +82 2 2124 4181 [email protected]

Seunghan Lee Senior Director Office Advisory & Marketing +82 2 2124 4253 Limited new supply in 2021 [email protected]

Vacancy is expected to tighten because of reduced new supply in 2021 and a RESEARCH rebound in leasing demand. JoAnn Hong Director Korea +82 2 2124 4182 [email protected] • Center Field (GFA 169,200 sq m) in GBD has enjoyed strong “Five-year treasury bond demand from tenants with pre-lease agreements and ongoing Simon Smith negotiations with occupiers from the gaming and e-commerce Senior Director yields increased 10 bps QoQ Asia Pacific fields. in Q1/2021, but effective cap +852 2842 4573 [email protected] • Average prime office headline rents rose by 2.0% YoY, with rate spreads held steady at Savills plc YBD showing the largest increase of 3.4% YoY. Savills is a leading global real estate service provider listed on 200 bps.” the London Stock Exchange. The • The quarterly office transaction volume totaled KRW3.9 company established in 1855, has a rich heritage with unrivalled trillion, up 52% YoY, marking the highest first quarter vol- SAVILLS RESEARCH growth. It is a company that leads rather than follows, and now has ume-to-date. over 600 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general • Investor interest in the Pangyo office market is high on the informative purposes only. It may lifting of 10-year resale restrictions. not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research. savills.co.kr/insight-and-opinion/ 1 Seoul Prime Office

SUPPLY DEMAND AND VACANCY RATES GRAPH 1: Growth Rate of Real GDP and Real In Q1/2021, Center Field (Former In Q1/2021, Seoul prime office net Exports, 2012 to 2022(F) Yeoksam Renaissance Hotel absorption increased 39,600 sq m, largely Redevelopment) was completed, adding Economic growth (GDP, annual variance in %) from move-ins to new buildings in YBD. Export growth (annual variance in %) 169,200 sq m to GBD. Game developer In CBD, DL Group (Former Daelim 8% Krafton is expected to relocate its HQ 7.1% Group) affiliates (23,500 sq m) moved from 7% from Pangyo to Center Field’s East Tower D Tower Gwanghwamun and the Korea 6% in June. Other global IT companies have Chamber of Commerce and Industry Bldg. shown interest in the project, reportedly 5% to D Tower Donuimun, while WeWork shed having signed pre-lease agreements. five floors (10,500 sq m) in Daishin Finance 4% 3.0% Other upcoming projects for 2021 include Center. While data shows considerable 3% K-Square Citi (Former Citibank Da-dong upgrade demand and expansion, net 2% HQ, 41,700 sq m) in CBD which began aborption in CBD decreased 17,300 sq m as a 1% remodeling in Q2/2020 and is expected to be result of several major vacancies. 0% completed in Q3/2021. Total supply in 2021 In GBD, vacancy from the departure is expected to be 210,900 sq m, just 26% of -1% of CJ ENM (16,100 sq m) in Q4/2020 was new supply added in 2020. -2% backfilled in Q1/2021, reflecting consistent 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022F office demand in GBD. Meanwhile, Doosan Source Bank of Korea (Economic Outlook, February 2021) ECONOMIC OUTLOOK Heavy Industries (32,400 sq m) moved The Monetary Policy Board of the Bank from Kyobo Gangnam Tower to Bundang of Korea (BoK) decided at its April 15 policy Doosan Tower constructed last quarter, meeting to leave the Base Rate unchanged and OurHome (3,600 sq m) left Meritz GRAPH 2: Number of Employees in Finance and at 0.5% for a seventh consecutive time since Insurance Sectors, January 2012 to March 2021 Tower for its newly constructed HQ in July 2020. In its Economic Outlook released Magok, resulting in a decrease in total net Financial institutions & insurance employees (LHS) in February 2021, BoK forecasts the global Unit: thousand persons absorption of 25,800 sq m. Total employment (RHS) economy to recover on stimulus programs In YBD, large-scale lease demand was 1,200 30,000 and mass vaccinations, while the domestic centered on recently constructed buildings 28,000 economy is expected to be boosted by strong 1,100 by first-time tenants and financial services exports and investment. Meanwhile, private companies. LG Energy Solution and GC 26,000 consumption is likely to recover slowly, and 1,000 Healthcare relocated to Parc.1 Towers 1 and employment is expected to remain sluggish 24,000 2, respectively, while KTB Investment & 900 in the short-term. BoK expects exports to Securities and Leesang Investment Group 22,000 continue their positive trend backed by moved to Yeouido Post Tower. Yeouido Post 800 global economic improvement and facilities Tower, which was supplied last quarter, is 20,000 investment to stage a solid recovery. BoK fully leased within 3 months of completion 700 18,000 forecasts real GDP to grow by 3.0% in 2021 by offering lower-than-district-average and 2.5% in 2022. rents. YBD showed the highest increase in 600 16,000 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

Source Korean Statistical Information Service

TABLE 1: New Supply, Q1/2021 TABLE 2: Monthly Rents, Maintenance Fees and Vacancy Rates by District, Q1/2021

(Unit: KRW/3.3058 sq m, GLA)

BUILDING RENT MAINTENANCE FEE VACANCY NET Center Field RATE NAME DISTRICT ABSORPTION YOY YOY (%) AVERAGE AVERAGE (SQ M) INCREASE (%) INCREASE (%) (PREV. Q) ADDRESS Gangnam-gu, Seoul 13.1% CBD 112,200 1.6% 44,500 1.8% -17,300 (12.6%) Total: 239,252 GFA (Office: 169,219, (SQ M) Retail: 25,834, 12.1% Hotel: 44,892) GBD 100,500 1.8% 40,500 1.2% -25,800 (3.9%)

COMPLETION January 2021 22.6% YBD 88,700 3.4% 40,100 0.9% 82,700 (27.4%)

Overall Seoul 15.1% FLOOR 36F/B7F 103,700 2.0% 42,300 1.4% 39,600 Average (13.6%)

Source Savills Korea Source Savills Korea

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lease demand among the major districts in space as of Q1/2021. While this, in turn, GRAPH 3: Net Absorption, Q1/2012 to Q1/2021 Q1/2021 with an increase in net absorption created vacancies, large-scale tenants have of 82,700 sq m. been rapidly filling up the subject properties. Unit: 1,000 sq m CBD GBD YBD 350 In Q1/2021, the vacancy rate of the Seoul There are numerous relocations and

300 prime office market stood at 15.1%, up 1.5% space reductions planned in CBD, but pts QoQ. CBD vacancy increased 0.5% pts to vacancy is expected to decline on higher net 250 13.1%, and YBD decreased 4.8% pts to 22.6%. take-up. Hyundai E&C TFT (12,400 sq m) 200 GBD vacancy climbed to 12.1% following lease expiry with Concordian Bldg. is set 150 the completion of Center Field (7% of GBD to expire and McKinsey Korea (4,700 sq m) 100 GLA), while the vacancy rate excluding will relocate from Center 1 to IFC Three. 50 Center Field increased by 1.2% pts QoQ to However, Olive Young (7,900 sq m → 12,000 0 5.1%. sq m) will expand within CBD from Twin -50 City Namsan to KDB Life Insurance Bldg., -100 RENT and SK Networks (26,200 sq m) and Seoul The average face rent for prime office -150 Tourism Organization (10,000 sq m) will space in Seoul ticked up by 2.0% YoY to -200 fully occupy Samil Bldg.

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 KRW103,700/pyeong. YBD exhibited the In GBD, Coupang (26,100 sq m) and 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 highest growth, rising 3.4% YoY, followed by PeopleFund (4,000 sq m) will wholly Source Savills Korea GBD (1.8% YoY) and CBD (1.6% YoY). While occupy HJ Tower, and Krafton (27,000 sq rent hikes usually occur at the beginning m) will relocate to Center Field. Center of the year, increases were likely limited on Field’s occupancy rate stood at around 23% large vacancies and the overall economic as of end-March and is set to reach 56% in downturn. In addition, rent-free allowances Q2/2021 upon successful closure of ongoing GRAPH 4: Prime Office Vacancy Rate, Q1/2012 to increased in a number of buildings with high Q1/2021 lease negotiations. New tenants are also vacancies in CBD. CBD GBD YBD expected to move into Kyobo Gangnam 30% The maintenance fee for Seoul prime Tower in Q2 and Q3, taking up 13,500 sq offices rose 1.4% YoY to KRW42,300/pyeong. m, equivalent to about half of the vacated 25% The growth rate in CBD was the highest at space left by Doosan Heavy Industries. The 1.8% YoY, while YBD increased by 0.9% YoY. vacancy rate in GBD is expected to fall below 20% 10% in Q2/2021 accounting for incoming OUTLOOK 15% move ins. In Q2/2021, the vacancy rate is expected Major relocations in YBD include NH 10% to tighten for all districts given a lack of Investment & Securities (57,500 sq m) and new supply. Since the second half of 2020, CAPE Investment & Securities (6,600 sq 5% the completion of Grand Central (CBD), m) to Parc.1 Tower 1 and Tower 2, eBEST Parc.1 Towers 1 and 2 (YBD), and Center Investment & Securities (14,200 sq m) and 0% Field (GBD) added 634,600 sq m of supply, Echon Accounting Corporation (5,900 sq Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 representing 9% of total Seoul prime office 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 m) to Yeouido Post Tower, and McKinsey

Source Savills Korea

GRAPH 5: YoY Rental Increase Rate by District, GRAPH 6: Take-up, Q1/2021 Q1/2012 to Q1/2021

CBD GBD YBD CPI growth rate(YoY) By Type By District 6% New 5% organisation 5% 4% Expansion 13% CBD 3% 32% Secondary 2% to prime YBD 43% 1% Prime to 56% prime GBD 0% 40% 13%

-1% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Savills Korea, Bank of Korea Source Source Savills Korea

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Korea (3,300 sq m) to Three IFC. NH (+52% YoY), the highest figure recorded in GRAPH 7: Prime Office Transaction Volumes, Investment & Securities and other existing any first quarter. About 60% of the total Q1/2012 to Q1/2021 tenants will be evacuating from KTB Bldg., transaction volume took place in CBD, while Q1 Q2 Q3 Q4 Unit: KRW (Trillion) which already has large vacancies from investment demand remained robust with 14 13 the relocation of KTB Group. Meanwhile, price-per-pyeong reaching its highest-ever 12 HI Investment & Securities plan to move level in GBD. 11 to KTB Bldg. in December following KORAMCO REITs & Trust managed to 10 remodeling this summer. In YBD, financial sell Pine Avenue Bldg. B to SRA 9 services are expected to drive high lease AMC for KRW620.0 billion. Despite vacancy 8 demand. However, tenant diversification exceeding 20% following the departure of 7 is also taking place given the move in of SK Telecom and Hanwha ICT in the second 6 healthcare and chemicals companies to half of 2020, the property was transacted at 5 4 Parc.1. a high unit price of KRW31.9 million/pyeong 3 given its central location. 2 TRANSACTIONS AND INVESTMENT AEW purchased Twin Tree Tower from 1 MARKET IGIS AMC for KRW434.0 billion (KRW26.0 0 Total investment activity in the Seoul million/pyeong). AEW, which previously 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source Savills Korea office market in Q1/2021 was KRW3.9 trillion secured City Center Tower with IGIS AMC,

TABLE 3: Major Tenant Relocations, Q1/2021

TO FROM

DISTRICT BUILDING TENANT AREA (SQ M) DISTRICT BUILDING

Daewoo Shipbuilding & Marine Grand Central 12,600 CBD DGB Finance Center Engineering

Credit-Suisse 4,400 CBD Hanwha Sogong Bldg. Centropolis UBS 2,400 CBD Seoul Finance Center

CBD State Tower Namsan Woongjin Food 2,900 Others KTIS Bldg. (Sungin dong) Ferrum Tower Dior 2,000 Others Cheongdam Hankook Bldg.

Signature Tower Codeit 1,300 NEW

Standard Chartered Bank HQ The New York Times 1,200 NEW

Booyoung Taepyeong Bldg. Shinhan Bank 6,100 Expansion

ABB Korea 3,300 GBD Hibro Bldg.

Hanho Construction 3,200 GBD Hanshin Intervalley 24 Bldg. Parnas Tower Riiid 3,200 GBD M Tower

Porsche Korea 1,400 GBD Porsche Tower GBD BNK Capital 2,300 GBD Gangnam Bldg. BNK Digital Tower (Former Platinum Tower) BNK Digital Center 1,700 GBD Gangnam Bldg.

Samsung Life Insurance 2,700 Expansion SeochoTower

Kyobo Gangnam Tower Mastern IMC 1,500 Expansion

KTB Investment & Securities 16,900 YBD KTB Bldg. / KTB AMC

Leesang Investment Group 5,800 YBD Shinsong Center Yeouido Post Tower KB Securities 2,000 YBD KB Finance Tower YBD Jaewon Industrial 2,000 GBD Trade Tower

WAVVE 2,000 Others SBS Prism Tower

Parc.1 Tower 1 LG Energy Solution 36,300 YBD LG Twin Tower Parc.1 Tower 2 GC Healthcare 13,500 Others Yongin GC Healthcare HQ Source Savills Korea

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successfully closed the deal following delays supported a highter transaction price. GRAPH 8: Prime Office Building Cap Rate Trend, from long-term vacancy created by the Samsung Fire & Marine Insurance’s Q1/2012 to Q1/2021 contract expiry with Hyundai E&C TFT in remaining lease period is known to be 5

Spread (RHS) Cap rate (LHS) 5yr Treasury bond yield (LHS) Q2/2019. years. 6% 700 CAPSTONE AMC acquired the Lotte Investor interest has been increasing Insurance Bldg. from Lotte Insurance on the lifting of 10-year resale period 600 5% for KRW224.0 billion (KRW19.2 million/ restrictions in Pangyo Technovalley,

500 pyeong). Having signed a leaseback and the unit price of transaction in 4% agreement, Lotte Insurance reportedly Pangyo is expected to continue to rise 400 sold the building to improve its financial if the sale proceeds. Currently, Pangyo 3% soundness ahead of the new payment H-Square, occupied by , has received 300 capacity system (K-ICS) that will be considerable interest and is expected to be 2% 200 implemented in 2023. Following the transacted at a higher price than expected. acquisition, CAPSTONE AMC plans to In Seoul, the sales of Daewoo Foundation 1% 100 remodel each floor one after another while Bldg., the Pinnacle Yeoksam, and Yeoksam

0% 0 retaining its tenants. Wooshin Bldg. and other assets from Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q1 Q3 Q1 Q3 Q1 Q3 In GBD, Smilegate, an online gaming maruting funds should contribute liquidity 2012 2013 2014 2015 2016 2017 2018 2019 2020 company, bought Orange Planet (Former to the market in 2021. Source Savills Korea, Bank of Korea Dong-gung Richwell Tower) for KRW200.0 The market cap rate in Q1/2021 was in the billion from Dong-gung Construction. The low-4.0% range, while the effective cap rate property was sold at KRW36.4 million/ – considering leasing concessions and actual GRAPH 9: Five-year Treasury Bond Yield and the pyeong, exceeding the previous all-time- occupancy rates – was in the low-to-mid 3% BOK Base Rate Trend, January 2012 to March 2021 high price of KOREIT Tower (Former range. While five-year treasury bond yields

5yr Treasury bond yield The Bank of Korea base rate Hyundai M&F Insurance Gangnam HQ) increased 10 bps QoQ in Q1/2021, cap rate 4.5% in GBD of KRW34.1 million/pyeong. The spreads on an effective rent basis remained

4.0% building, renamed Orange Planet, will steady at around 200 bps. include startup space for youths and related 3.5% investment affiliates. 3.0% Shinhan REITs Management purchased

2.5% Samsung Fire & Marine Insurance Yeoksam Bldg. for KRW158.0 billion (KRW30.0 2.0% million/pyeong) from KB Real Estate 1.5% Trust. Despite being a strata deal for

1.0% 50% of the building’s GFA, the lease with tenant Samsung Fire & Marine Insurance 0.5%

0.0% Jan- 12 Jan- 13 Jan- 14 Jan- 15 Jan- 16 Jan- 17 Jan- 18 Jan- 19 Jan- 20 Jan- 21 Source Bank of Korea

TABLE 4: Major Investment Transactions, Q1/2021

BUILDING TRANSACTED TRANSACTION PRICE DISTRICT SELLER BUYER NAME AREA (SQ M) (KRW BIL)

CBD Pine Avenue B KORAMCO REITs & Trust Samsung SRA AMC 64,225 6,200

IGIS AMC CBD Twin Tree Tower A,B IGIS AMC 55,201 4,340 (AEW)

CBD Lotte Insurance Tower Lotte Insurace CAPSTONE AMC 38,532 2,240

Orange Planet SPMC GBD (Former Dong-gung Dong-gung Construction 18,167 2,000 (Smilegate) Richwell Tower)

Samsung Fire & Marine Savills Korea GBD KB Real Estate Trust Source Shinhan REITs Management 17,450 1,580 *TransactedInsurance area Yeoksam is derived Bldg. as a product of the Transacted Share and total building GFA

Source Savills Korea

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Overview of the Seoul Office Market and Savills Korea Office Survey

TABLE 5: Summary Of Surveyed Buildings, March 2021

CBD GBD YBD Total

Number of buildings 25 14 12 51

A Average GFA (sq m) 89,000 107,000 114,000 100,000

Average year of completion 2004 2005 2008 2005

Number of buildings 25 22 10 57

B Average GFA (sq m) 53,000 47,000 50,000 50,000

Average year of completion 2000 2002 2001 2001

Total number of buildings 50 36 22 108

Total area (sq m) 3,530,000 2,530,000 1,870,000 7,930,000

Source Savills Korea Research & Consultancy

Close to 56% of large office buildings (30,000 sq m or more) in Seoul are Monthly rent: Surveyed rents are “face rents”, the asking rents reported by located in three major business districts – the CBD (25%), GBD (19%) and landlords for mid-level floors. These rents are standardised by Savills Korea to YBD (12%). The CBD is the largest of these districts and is home to major account for variations in the security deposits required by different landlords to government and multinational institutions. The GBD also houses many produce an effective rental figure for NLA. multinational companies and is an information technology centre, while YBD, the “Wall Street” of , includes the headquarters of major Cap Rate Calculation Method securities firms and broadcasting companies. Cap rate: (income from interest on security deposit (5%) + face rent of a standard floor + residual income from maintenance fee) × occupancy rate The Savills Korea Quarterly Office survey is the longest running survey of (90%) × 12 / transaction amount. prime office stock in Seoul. Established in 1997, it currently comprises of 108 among 132 buildings in Seoul classified as “prime” buildings. For comparison of cap rates of each transaction case, a 5% interest rate on security deposit and 90% occupancy rate were uniformly applied. Prime buildings: Buildings with a GFA greater than 30,000 sq m with good The applied occupancy rate was revised from 95% to 90% in 2014 due to higher accessibility and facilities, high level of finish, and creditworthy blue-chip tenants. natural vacancy rates.

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